Why Nations Fail: The Origins of Power, Prosperity, and Poverty (59 page)

In the 1940s, Perón had cultivated the labor movement as a political base. When it was weakened by military repression in the 1970s and ’80s, his party simply switched to buying votes from others
instead. Economic policies and institutions were designed to deliver income to their supporters, not to create a level playing field. When President Menem faced a term limit that kept him from being reelected in the 1990s, it was just more of the same; he could simply rewrite the constitution and get rid of the term limit. As El Corralito shows, even if Argentina has elections and popularly elected governments, the government is quite able to override property rights and expropriate its own citizens with impunity. There is little check on Argentine presidents and political elites, and certainly no pluralism.

What puzzled Kuznets, and no doubt many others who visit Buenos Aires, is that the city seems so different from Lima, Guatemala City, or even Mexico City. You do not see indigenous people, and you do not see the descendants of former slaves. Mostly you see the glorious architecture and buildings put up during the Belle Epoch, the years of growth under extractive institutions. But in Buenos Aires you see only part of Argentina. Menem, for example, was not from Buenos Aires. He was born in Anillaco, in the province of La Rioja, in the mountains far to the northwest of Buenos Aires, and he served three terms as governor of the province. At the time of the conquest of the Americas by the Spanish, this area of Argentina was an outlying part of the Inca Empire and had a dense population of indigenous people (see Map 1 on
this page
). The Spanish created
encomiendas
here, and a highly extractive economy developed growing food and breeding mules for the miners in Potosí to the north. In fact, La Rioja was much more like the area of Potosí in Peru and Bolivia than it was like Buenos Aires. In the nineteenth century, La Rioja produced the famous warlord Facundo Quiroga, who ruled the area lawlessly and marched his army on Buenos Aires. The story about the development of Argentine political institutions is a story about how the interior provinces, such as La Rioja, reached agreements with Buenos Aires. These agreements were a truce: the warlords of La Rioja agreed to leave Buenos Aires alone so that it could make money. In return, the Buenos Aires elites gave up on reforming the institutions of “the interior.” So Argentina at first appears a world apart from Peru or Bolivia, but it is really not so different once you leave the elegant boulevards of Buenos Aires. That the preferences and the politics of the interior got embedded
into Argentine institutions is the reason why the country has experienced a very similar institutional path to those of other extractive Latin American countries.

That elections have not brought either inclusive political or economic institutions is the typical case in Latin America. In Colombia, paramilitaries can fix one-third of national elections. In Venezuela today, as in Argentina, the democratically elected government of Hugo Chávez attacks its opponents, fires them from public-sector jobs, closes down newspapers whose editorials it doesn’t like, and expropriates property. In whatever he does, Chávez is much more powerful and less constrained than Sir Robert Walpole was in Britain in the 1720s, when he was unable to condemn John Huntridge under the Black Act (
this page
–
this page
). Huntridge would have fared much less well in present-day Venezuela or Argentina.

While the democracy emerging in Latin America is in principle diametrically opposed to elite rule, and in rhetoric and action it tries to redistribute rights and opportunities away from at least a segment of the elite, its roots are firmly based in extractive regimes in two senses. First, inequities persisting for centuries under extractive regimes make voters in newly emerging democracies vote in favor of politicians with extreme policies. It is not that Argentinians are just naïve and think that Juan Perón or the more recent Perónist politicians such as Menem or the Kirchners are selfless and looking out for their interests, or that Venezuelans see their salvation in Chávez. Instead, many Argentinians and Venezuelans recognize that all other politicians and parties have for so long failed to give them voice, to provide them with the most basic public services, such as roads and education, and to protect them from exploitation by local elites. So many Venezuelans today support the policies that Chávez is adopting even if these come with corruption and waste in the same way that many Argentinians supported Perón’s policies in the 1940s and 1970s. Second, it is again the underlying extractive institutions that make politics so attractive to, and so biased in favor of, strongmen such as Perón and Chávez, rather than an effective party system producing socially desirable alternatives. Perón, Chávez, and dozens of other strongmen in Latin America are just another facet of the iron law of
oligarchy, and as the name suggests, the roots of this iron law lies in the underlying elite-controlled regimes.

In November 2009, the government of North Korea implemented what economists call a currency reform. Severe bouts of inflation are often the reasons for such reforms. In France in January 1960, a currency reform introduced a new franc that was equal to 100 of the existing francs. Old francs continued in circulation and people even quoted prices in them as the change to the new francs was gradually made. Finally, old francs ceased to be legal tender in January 2002, when France introduced the euro. The North Korean reform looked similar on the face of it. Like the French in 1960, the North Korean government decided to take two zeros off the currency. One hundred old wons, the currency of North Korea, were to be worth one new won. Individuals were allowed to come forward to exchange their old currency for the newly printed currency, though this had to be done in one week, rather than forty-two years, as in the French case. Then came the catch: the government announced that no one could convert more than 100,000 won, though it later relaxed this to 500,000. One hundred thousand won was about $40 at the black market exchange rate. In one stroke, the government had wiped out a huge fraction of North Korean citizens’ private wealth; we do not know exactly how much, but it is probably greater than that expropriated by the Argentine government in 2002.

The government in North Korea is a communist dictatorship opposed to private property and markets. But it is difficult to control black markets, and black markets make transactions in cash. Of course quite a bit of foreign exchange is involved, particularly Chinese currency, but many transactions use won. The currency reform was designed to punish people who used these markets and, more specifically, to make sure that they did not become too wealthy or powerful enough to threaten the regime. Keeping them poor was safer. Black markets are not the whole story. People in North Korea
also keep their savings in wons because there are few banks in Korea, and they are all owned by the government. In effect, the government used the currency reform to expropriate much of people’s savings.

Though the government says it regards markets as bad, the North Korean elite rather like what markets can produce for them. The leader, Kim Jong-Il, has a seven-story pleasure palace equipped with a bar, a karaoke machine, and a mini movie theater. The ground floor has an enormous swimming pool with a wave machine, where Kim likes to use a body board fitted with a small motor. When in 2006 the United States placed sanctions on North Korea, it knew how to really hit the regime where it hurt. It made it illegal to export more than sixty luxury items to North Korea, including yachts, water scooters, racing cars, motorcycles, DVD players, and televisions larger than twenty-nine inches. There would be no more silk scarves, designer fountain pens, furs, or leather luggage. These were exactly the items collected by Kim and his Communist Party elites. One scholar used sales figures from the French company Hennessy to estimate that Kim’s annual cognac budget before the sanctions could have been as high as $800,000 a year.

It is impossible to understand many of the poorest regions of the world at the end of the twentieth century without understanding the new absolutism of the twentieth century: communism. Marx’s vision was a system that would generate prosperity under more humane conditions and without inequality. Lenin and his Communist Party were inspired by Marx, but the practice could not have been more different from the theory. The Bolshevik Revolution of 1917 was a bloody affair, and there was no humane aspect to it. Equality was not part of the equation, either, since the first thing Lenin and his entourage did was to create a new elite, themselves, at the head of the Bolshevik Party. In doing so, they purged and murdered not only non-communist elements, but also other communists who could have threatened their power. But the real tragedies were yet to come: first with the Civil War, and then under Stalin’s collectivization and his all-too-frequent purges, which may have killed as many as forty million people. Russian communism was brutal, repressive, and bloody, but
not unique. The economic consequences and the human suffering were quite typical of what happened elsewhere—for example, in Cambodia in the 1970s under the Khmer Rouge, in China, and in North Korea. In all cases communism brought vicious dictatorships and widespread human rights abuses. Beyond the human suffering and carnage, the communist regimes all set up various types of extractive institutions. The economic institutions, with or without markets, were designed to extract resources from the people, and by entirely abhorring property rights, they often created poverty instead of prosperity. In the Soviet case, as we saw in
chapter 5
, the Communist system at first generated rapid growth, but then faltered and led to stagnation. The consequences were much more devastating in China under Mao, in Cambodia under the Khmer Rouge, and in North Korea, where the Communist economic institutions led to economic collapse and famine.

The Communist economic institutions were in turn supported by extractive political institutions, concentrating all power in the hands of Communist parties and introducing no constraints on the exercise of this power. Though these were different extractive institutions in form, they had similar effects on the livelihoods of the people as the extractive institutions in Zimbabwe and Sierra Leone.

Cotton accounts for about 45 percent of the exports of Uzbekistan, making it the most important crop since the country established independence at the breakup of the Soviet Union in 1991. Under Soviet communism all farmland in Uzbekistan was under the control of 2,048 state-owned farms. These were broken up and the land distributed after 1991. But that didn’t mean farmers could act independently. Cotton was too valuable to the new government of Uzbekistan’s first, and so far only, president, Ismail Karimov. Instead, regulations were introduced that determined what farmers could plant and exactly how much they could sell it for. Cotton was a valuable export, and farmers were paid a small fraction of world market prices for their crop, with
the government taking the rest. Nobody would have grown cotton at the prices paid, so the government forced them. Every farmer now has to allocate 35 percent of his land to cotton. This caused many problems, difficulties with machinery being one. At the time of independence, about 40 percent of the harvest was picked by combine harvesters. After 1991, not surprisingly, given the incentives that President Karimov’s regime created for farmers, they were not willing to buy these or maintain them. Recognizing the problem, Karimov came up with a solution, in fact, a cheaper option than combine harvesters: schoolchildren.

The cotton bolls start to ripen and are ready to be picked in early September, at about the same time that children return to school. Karimov issued orders to local governors to send cotton delivery quotas to schools. In early September the schools are emptied of 2.7 million children (2006 figures). Teachers, instead of being instructors, became labor recruiters. Gulnaz, a mother of two of these children, explained what happens:

The harvest lasts for two months. Rural children lucky enough to be assigned to farms close to home can walk or are bused to work. Children farther away or from urban areas have to sleep in the sheds or storehouses with the machinery and animals. There are no toilets or kitchens. Children have to bring their own food for lunch.

The main beneficiaries from all this forced labor are the political elites, led by President Karimov, the de facto king of all Uzbeki cotton. The schoolchildren are supposedly paid for their labor, but only supposedly. In 2006, when the world price of cotton was around $1.40 (U.S.) per kilo, the children were paid about $0.03 for their daily quota of twenty to sixty kilos. Probably 75 percent of the cotton harvest is now picked by children. In the spring, school is closed for compulsory hoeing, weeding, and transplanting.

How did it all come to this? Uzbekistan, like the other Soviet Socialist Republics, was supposed to gain its independence after the collapse of the Soviet Union and develop a market economy and democracy. As in many other Soviet Republics, this is not what happened, however. President Karimov, who began his political career in the Communist Party of the old Soviet Union, rising to the post of first secretary for Uzbekistan at the opportune moment of 1989, just as the Berlin Wall was collapsing, managed to reinvent himself as a nationalist. With the crucial support of the security forces, in December 1991 he won Uzbekistan’s first-ever presidential election. After taking power, he cracked down on the independent political opposition. Opponents are now in prison or exile. There is no free media in Uzbekistan, and no nongovernmental organizations are allowed. The apogee of the intensifying repression came in 2005, when possibly 750, maybe more, demonstrators were murdered by the police and army in Andijon.